Investorsshakenasrenminbi’sreputationas‘one-waybet’soursLastweektherenminbididsomethingithasnotdoneforyears–itshockedthemarket.Duringthefinalthreetradingsessionsoftheweek,theChinesecurrencydroppedasmuchas1.3percentagainsttheUSdollar,markingitsbiggestthree-dayfallsince2011.Therenminbiisnow0.6percentweakeragainstthedollarthanitwasatthestartoftheyear.Whilethepercentagedeclinemayappearsmallcomparedwithsomeoftherecentdouble-digitswingsinotheremergingmarketcurrenciessuchastheArgentinepesoorKazakhtenge,amoveofsuchmagnitudeintherenminbiishighlyunusual.Itcouldalsospelltroubleforinvestors.Afteryearsofultra-lowvolatilitythankstothemanagedpegagainstthedollar,therenminbihasoftenbeenthesubjectoflarge,highly-leveragedpositionsforinvestorsviewingitasaneffectiveone-waybet.ANZ’sPatrickPerret-Greensaidthesell-offhadleftsomespeculativeinvestorswitha“verybloodynose”.MitulKotecha,FXstrategistatCréditAgricoleCIB,saidthatlastweek’smovecouldbeasignalofashiftinChinesecurrencypolicy.“Themarketwasextremelylong,andwe’veseenabigshakeoutofthesepositions”,saidMrKotecha.“Theywanttotryandatleastprovokemoreriskandmoreuncertaintyintakingthistrade.Theyaregoingtokeepengineeringvolatilityuntilthatbecomesthecase.”Thesharpmovefollowsaperiodduringwhichtheoffshorerenminbiratehasbeentradingatanincreasingpremiumtotheonshorerate.Thatsplit–apermanentfeatureofthemarket–issomethingmadepossiblebyChina’sstrictcontrolsonitscapitalaccount.GlobalinvestorsusuallytakebetsonthecurrencythroughitsHongKongiteration,knownbytheshorthandCNH.WithinChina,companiesandinvestorsusetheofficialonshorerate,orCNY.Earlylastweek,theCNHratehadreacheditsbiggestspreadovertheCNYratesince2010,suggestingthatinternationalenthusiasmfortherenminbihadovertakenthatfromwithinChinaitself.CurrencyanalystssaythiswideninggapmayhaveproddedthePeople’sBankofChinaintoaction.Thecentralbanksetsthedailyfixingratearoundwhichtherenminbiispermittedtofallorgain1percentaday,andlastweekitguidedtheonshorecurrencyweakerthroughhigherfixes.SomebelievethatthemovebythePBoCtodampappreciationexpectationsispartofitswider,long-heldaimofintroducingmoretwo-wayvolatilityintothemarket.Itcouldalsobeanattempttobringtheonshoreandoffshoreratestogetherbeforethecentralbankwidensthedailytradingband,somethingithaspromisedtodosoon.ThebandwaslastchangedinApril2012,whenitwasdoubledfrom0.5percent.“Thisisatacticalmovebythecentralbanktointroducemorevolatilitybeforewideningthetradingband.Theyarecreatingconditionsforthattohappen,”saidShuangDing,ChinaeconomistatCiti.“Ifthecurrencycontinuestoappreciateandthereisverylittlevolatility,itwillonlyfuelspeculationofmoreappreciation.”WeakereconomicdataoutofChinamayalsohaveplayeditspartinthesell-off.LastweekHSBC’sflashindexofmanufacturingactivityfelltoitslowestlevelinsevenmonths,asignthatthecountry’sexportengineisyettofireupthisyear.SentimenttowardsChinahasalsobeenhitbygrowingtroublesinthecountry’svastshadowbankingsector.Manyanalystsbelievethelonger-termstoryofrenminbiappreciationremainsintact.HSBCstillexpectstherenminbitoreachRmb5.98againstthedollarbytheendoftheyear,equivalenttoabouta2percentgainfromMonday’sspotrate.Andunlikeinpreviousperiodsofrenminbiweakness–suchasinthesummerof2012–thismostrecentbouthasnotbeenaccompaniedbylargecapitaloutflowsfromthecountry.Ifanything,theoppositeistrue–themostrecentdatashowthatmoneycontinuestopour...
